Housing, the Economy, and Wood Products Markets - - today and

thoughts about tomorrow

Al Schuler ( aschuler@fs.fed.us) USDA Forest Service

AFOA Session January 21, 2009.

Housing Issues

Today’s Economic Crisis – A Chronology

1. Housing Collapse – easy credit, unrealistic expectations,weak regulation, greed, exotic financial instruments –CDO’s, SIV’s. As house prices reached unsustainable levels and mortgage rates increased, foreclosures increased and house prices tumbled. The financial people realized the assets( i.e., the houses) were overvalued, and the mortgage backed securitiesdecreased in value – many became worthless. Banks lost moneyand the credit crunch began as banks began a “deleveraging” process– and stopped lending. House prices collapsed further as mortgages reset, forcing even more foreclosures, and more pain for banks.

2. The financial crisis that stated with the mortgage market, spreadto commercial real estate and credit cards as the entire financial systemwas freezing up.

3. This caused job losses in construction, and other industries, especially onesthat rely on credit for business – autos and other big ticket items, etc.

4. Job losses escalate - - enter the recession.

Solution - - Stabilize housing markets by addressing foreclosure problem

Home prices and incomes must trend together- when price exceeds ability to pay ( incomes)

house prices must come down

100

120

140

160

180

200

220

240

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

2008(th Sept)New home price Existing home price Median Family Incomes

Income and Price set to Index of 100 in 1990

Sustainable relationship

correction

Sources: NAHB & NAR – Home prices; U.S. Census – family income

Case Shiller National Home Price Index*some analysts suggest prices need to fall another 15%to bring prices and incomes back to historical norms

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2000

2003

2006

Qtr, % change, Year over Year

* Existing homes

Qtr 3 08

Price Rise Not realistic

Source: MBA, Dennis Couchon, USA Today, Dec 12 2008

Housing InventoryStill too large

0500

100015002000250030003500400045005000

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Existing New

Thousand Units, Single Family

Annual – 1990 - 2007

2008 – monthly

Adjustable and fixed Rate Mortgage Resets - -To date, most of the problems came from subprime mortgages,however, over the next 4 years, there are toxic mortgage resetsthat exceed the subprime problem by 50% or $500 billion

Subprime, Alt A, and Option Adjustable Arm Mortgages

• Subprime – loans to people with poor credit scores – FICO score less than 620. These are the mortgages that caused the initial housing crisis!

• Alt A – loans given to people with good credit scores, but you don’t have to submit all of the documentation required for a straight loani.e.;, don’t have to show or prove their income or ability to pay for the loan

• Option adjustable rate mortgage – adjustable rate mortgages with flexible payment options – two onerous options are interest only payment, and “minimum payment amount ( doesn’t even include full amount of interest due). Problem occurs when this mortgage resets

• Size comparison: (1) subprime $1 trillion ; (2) Alt A $1 trillion(3) Option adjustable ARMS $600 billion

• Problem – Alt A and Option ARMs will reset between 2009 – 2012Default rates are high, so we could see a continuation of the housing crisis for another 4 years UNLESS we solve the Foreclosure problems

Single Family Housing starts

0200400600800

100012001400160018002000

2005 - Jan

2005 - Jul

2006 - Jan

2006 - Jul

2007 - Jan

2007 - Jul

2008 - Jan

2008 - Jul

Thousand units

Source: U.S. Census

Down 76% from 2005 peak to today

Forecast of Experts2009 Housing Starts ( thousands)

741247494Average

662186476HIS global Insight

731286445NAR

820285535MBA

694193501NAHB

798285513Fannie Mae

TotalMultifamilySingle Family

Forecast dates: latest availableJan 13 – 2009.

NAHB’s Latest Forecast

19492073

1812

1341

924694

909

0

500

1000

1500

2000

2500

2004 2005 2006 2007 2008F 2009F 2010F

Thousand starts

Source: NAHB, November 24, 2008

67% drop from 2005 peak to 2009 bottomModest recovery starting 2nd half 09?

Long Term Housing Demand DriversLonger term outlook is solid based on demographics

( household formations plus net immigration)

-0.5

0

0.5

1

1.5

2

2.5

Boom : 76-85

Bust: 91-2000

2008-2012

2013-2017

Demographics Vacancy demand Net Removals

Million per year

Source: NAHB, June 2008

Vacancy demand – 2nd homes, spec homesRemovals – net loss from existing inventoryof housing stock

Remodeling Market - -Pulling back in response to poor economy

Long Term - New Construction vs RemodelingRemodeling becoming increasingly important & is

the key market for wood products

191220

280

338

402

230

300

424 418453

$100

$200

$300

$400

$500

1995 2000 2005 2010 2015

Remodeling New constrcution

45%

42%

40%

45%

47%

36%

38%

40%

42%

44%

46%

48%

1995 2000 2005 2010 2015

Billions 2005 dollars

Source: Harvard JCHS 2007

Remodeling share of residential investment

The Economy

Net change in Non Farm payrolls

-700-600-500-400-300-200

-1000

100200300

"Jan 07"

"Jan 08"

2.58 million net job loss in 2008 1.5 million in Qtr 4 alone

Source: U.S. BLS ( www.bls.gov )

( thousand )

Consumer ConfidenceKey to future consumption, investment and lending

0

20

40

60

80

100

120

JAN 06 A

PR J

UL O

CT J

AN 07 A

PR J

UL O

CT J

AN 08 A

PR J

UL O

CT

Source: Conference Board (http://www.conference-board.org/economics/ConsumerConfidence.cfm

Index : 1985 = 100

Dec 08 = 38Lowest on record

Wood Product Markets

Softwood Markets

2007 U.S. Softwood Lumber

55 BBF (144 million Cubic Meters)

Industrial25%

New Residential*36%

R&A34%

NR4%

2007 U.S. Structural Panels35.2 BSF(3/8) (36 million Cubic Meters)

New Residential*45%

Industrial23%

R&A24%

NR.5%

*New Residential incl. SF, MF, and Mobile Homes

Source: RISI, 2008

Export 1.5%Export 1.7%

0

0.5

1

1.5

2

2.5

2002 2003 2004 2005 2006 2007 2008$200

$300

$400

$500

$600

$700

Starts Lumber ( FLC) Panels ( SPC)

Starts ( Million units) Price, $/M

Lumber and Panel Prices Follow Housingand, … stumpage prices track lumber prices

• U.S. Consumption (BBF): 2005 2006 2007 2008 2009(E)*64 60 52 41 35

• Western Production (BBF): 19.4 18 16.3 13.4 11.8

• Southern Production : 19.0 18.6 16.7 13.9 12

• PRICESSPC down $288/M from April 2004 ( Peak) – today 52% dropFLC down $234/M from Aug 2004 (Peak) - today – 49% drop

• Stumpage & Del’vd Log Prices & SYP Sawtimber: 2004 - 2008Stumpage down 48% constant dollarsDelivered logs prices down 30% constant dollars

Softwood Lumber Stats

2009 estimates from WWPA, Jan 2009(http://www2.wwpa.org/ABOUTWWPA/Newsroom/tabid/817/Default.aspx

WV Hardwood Stumpage Prices

$150$200$250$300$350$400$450$500$550

2003

2004

2005

2006

2007

2008

Red Oak Hard Maple Walnut

Source: WVU AHC

Qtr, $/M, International

Housing impact

Export impact

Yes - Hardwood Lumber Prices tied to Housing!

$0

$400

$800

$1,200

$1,600

$2,000

"Dec04"

"Dec05"

"Dec06"

"Dec07"

"Nov08"

Hard Maple, 1C,KD 1&2 white,$/M, Appalachian Region

Source: HMR

Housing and Hardwood Product Markets– - strong linkages

Source: HMR Executive, December 2008

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

GDP

Housing startsCabinet salesW

ood furn shptsFlooring shptLum

ber exp (vol)Crosstie (inv)Sawm

ill prod